How a Capitalist Should Tackle Climate Change

Fortune

The idea of using taxes to reduce pollution has long enjoyed widespread support among economists. Yet despite its impeccable economic logic, a tax on carbon has so far proven unpopular with the public and politicians alike. Why? The lack of short-term benefits is the primary culprit. It is inherently difficult to ask citizens to make sacrifices now for benefits (a safer climate) that will accrue to others in the future. But there is an easy, capitalist fix: return all the money raised directly to the people, thereby offering all Americans tangible benefits in the here and now.

In The Conservative Case For Carbon Dividends, my co-authors James Baker, George Shultz, Henry Paulson, Martin Feldstein, Gregory Mankiw, Tom Stephenson, Rob Walton and I propose a distinctly capitalist solution to climate change. Capitalism is a wonderful system, even though – like many operating systems – it suffers from an occasional bug. The most significant is that market prices fail to take social and environmental costs into account, which explains why greenhouse gas emissions have reached dangerous levels. The obvious remedy is taxing pollution. Indeed, our solution boils down to getting the price signals right, and the government out of the way.

Our statement should put to rest several myths that impede a more ambitious and coherent American climate response. First, it shows that Democrats have no monopoly of concern about protecting our climate. Contrary to the easy characterization of Republicans as climate deniers, many Republican leaders take seriously the risk of climate change, and a good number are looking for the right opportunity to orchestrate a collective climate jailbreak.

Second, much of the Republican resistance has not been about the ends of climate policy, but rather about the means. Here the Democratic left deserves part of the blame for the extreme polarization of climate politics in America. Not only have they long espoused heavy-handed regulation as their preferred climate remedy, but they refuse to acknowledge the legitimate conservative concerns about the growth-inhibiting effects of this regulation, and the risks it poses to the competitiveness of American firms.

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The world has long been waiting for the “Killler App” of climate policy. This is the best candidate yet, because it harnesses the full power of the marketplace and enables all leading factions to claim an important victory.

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